What Tesla Stands To Gain From Sharing Its Patents

On June 12 2014, Tesla Motors‘ CEO, Elon Musk, wrote a blog stating that the company would not initiate lawsuits against anyone who wishes to use their technology in good faith. While the wording of the statement is too ambiguous to be interpreted as a declaration that Tesla is going to make its patents available to anyone who wishes to see them for zero license fees, it does hint at the possibility that the automaker is willing to offer to license its technologies on Reasonable and Non-Discriminatory terms. RAND terms are a set of rules that companies are obliged to meet when licensing patent rights. These terms ensure that :

the terms are not anti-competitive and do not entrench the power of dominant firms in their respective markets

rights are licensed at rates that if aggregated would not make the industry uncompetitive

the terms must be applied in a non-discriminatory manner.

This move comes amid a growing concern among investors that the company would not be able to repay $2.2 billion in debt over the next four to seven years, after its bonds were assigned a junk rating in May by credit rating agency Standard & Poor's. In our analysis below, we look at the reasons for this move, and the potential benefits and risks that Tesla stands to gain from it.

The willingness to share its technology is not new to Tesla. The automaker has already been engaged in partnerships with other vehicle manufacturers like Toyota and Daimler. Daimler spent $50 million in 2009 for a 10% stake in Tesla and Toyota bought $50 million worth of stock when Tesla went public in July 2010. Additionally, both companies relied on Tesla for help in the development of electric vehicles. Daimler uses a Tesla battery in the electric version of its Smart city car, and its Mercedes B-class EV features a Tesla power train. Toyota, on the other hand, signed a $100 million-contract with Tesla to supply power trains, battery, gearbox and software for the RAV4 EV. (The deal ended in May 2014)

This announcement means that Tesla might be willing to slowly phase out its business of supplying parts to other companies. Instead, allowing access to Tesla's patents – among which are rumored to be patents related to its supercharging network, power trains and cylindrical batteries – should enable companies to manufacture their own parts. This is a smart move that should not have any impact on Tesla's position as a market leader of electric vehicles. In the process of manufacturing electric vehicles, Tesla might have discovered a number of things, some of which it might have committed to these patents, while retaining the rest of it. Moreover, these patents refer to knowledge that the company has been utilizing for a while, and in the time it takes for companies that use these patents to manufacture their own electric vehicles, Tesla will have moved ahead. At the same time, access to this knowledge will allow other companies to manufacture electric vehicles of their own, thus increasing the market size for Tesla's vehicles at virtually no cost for the company.

Network Effects

In the blog post, Elon Musk stated that he was disappointed with the rate at which other car companies were adopting the electric vehicle technology. As the global production of vehicles approaches 100 million per year, electric vehicles only form less than 1% of that number. [1] Tesla moved into the supplier business in order to nudge other companies into adopting the technology but the company?s efforts so far have not paid off. By granting access to its technology, the company is hoping that more vehicle manufacturers will adopt the technology, thereby growing the market for EV?s. If the move is successful, it could lead to advantageous network effects for the company:

A bigger market for electric vehicles, with Tesla established as the cutting edge manufacturer of the same, will allow the company access to a much larger market than the one it currently targets.

If other companies adopt the technology of Tesla's supercharging network, Tesla will have managed to construct charging networks compatible with their technology for next to no costs.

This will mean that consumers currently unwilling to buy Tesla's vehicles for fear of lack of infrastructure might be persuaded to adopt their vehicles.

This will allow the company to grow its sales revenues without ceding a competitive advantage.